DODGE & COX FUNDS, N-30B-2, 1998-11-18

DODGE & COX FUNDS
N-30B-2, 1998-11-18

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<PAGE>

D O D G E & C O X D O D G E & C O X
- ----------------- -----------------
Stock Fund Stock Fund
Established 1965

Investment Managers -----------------
Dodge & Cox
One Sansome Street -----------------
35th Floor
San Francisco, California
94104-4405
(415) 981-1710

For Fund literature and
information, please visit the
Funds' web site at:

www.dodgeandcox.com

or write or call:

Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
- -----------------

This report is submitted
for the general information
of the shareholders of the
Fund. The report is not
authorized for distribution
to prospective investors Third Quarter Report
in the Fund unless it is September 30, 1998
accompanied by an effective
prospectus. 1998
- ----------------- -----------------
-----------------
-----------------

Printed on recycled paper.
9/98 SF QR
<PAGE>

D o d g e & C o x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Stock Fund

To Our Shareholders
- --------------------------------------------------------------------------------

The Dodge & Cox Stock Fund had a total return of -14.3% for the quarter ended
September 30, 1998 and -7.0% for the first nine months of 1998. This compared
to returns of -9.9% and +6.0% for the Standard & Poor's 500 (S&P 500) Index
over the same respective time periods. Longer term results of the Fund appear
on page three of this report. On September 30, total net assets in the Fund
were just under $4.0 billion with approximately 96% of these assets invested
in stocks and 4% invested in cash equivalents.

As can be seen from the results above, this has been a difficult period for
the Stock Fund. Recent months have been a time of unprecedented developments:
global economies continue unsettled and the U.S. equity market has been
volatile in the face of this global uncertainty. In this context, investment
returns of the Stock Fund have been disappointing, particularly when compared
with the return of the S&P 500.

Return Disparities in the S&P 500

. Strong investment returns were concentrated in a very narrow group of
large, high-profile companies. More than ninety percent of the S&P
500's total return came from ten companies alone, which on average had
price increases of 74% for the nine month period ended September 30.
Most of these companies have two things in common: they are viewed by
many investors as relatively "safe" from an economic slowdown, and
they already had high valuations even at the start of the year. As the
global situation became increasingly unstable, these high value stocks
rose to even higher relative prices.

. Conversely, stock prices were weak for a broad number of companies, as
the remaining 490 companies in the S&P 500 had an average price
decline of about 4% for the same period. Companies with exposure to
global markets were particularly weak and industrial commodities,
capital goods and energy companies underperformed the market averages,
in some cases by a wide margin.

The negative performance of the Fund clearly reflects this disparity in
investment results. If one did not own the "top ten" stocks, portfolio returns
were probably disappointing when compared with the S&P 500. Consistent with
our longstanding "price-disciplined" approach, we have not invested in higher
valuation companies. We continue to be skeptical that these companies can
maintain their rapid growth and high profitability to the degree that other
investors appear to expect. In spite of the fact that many of these stocks
have performed strongly in the recent period, we continue to believe that more
attractive long-term value lies elsewhere.

Our Investment Discipline: Staying the Course

Without doubt, it is in times of uncertainty and pessimism that one can find
the bargains that become the critical ingredients to future investment
performance. At this time, we believe it is essential to stay with our long-
established investment philosophy. Using a research-driven approach to stock
selection, combined with our longstanding price discipline, Dodge & Cox
remains focused on the lower valuation areas of the equity market. We seek to
make long-term investments in companies with durable business franchises.
"Durable" has a number of elements. We evaluate the importance of a company in
its area of expertise, the strength of its financial condition and the
strategies of its management team. We analyze the external environment faced
by the company: the secular and cyclical demand for its products or services,
the nature of the competition and the structure of its industry. We research
carefully, talking with company management, consultants and competitors. We
want to invest in a company at a time when its stock price reflects more
pessimistic expectations on the part of other investors, but when, based on
our independent research, we see the potential for a positive earnings
surprise over the next three to four years. In other words, we find
opportunity when our long-term outlook for the company is brighter than other
investors are willing to acknowledge and incorporate into its stock price.
Which are those companies now?

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>

- --------------------------------------------------------------------------------
Current Portfolio Strategy

A diverse and critical part of the economic landscape consists of basic
providers to the global infrastructure, such as industrial commodities, energy
and machinery producers. These companies have suffered from the recessions in
Asia and the near-term financial impact is real. The companies' stock prices
already reflect investor concerns about the prospect of slowing growth and
declining earnings. Yet we believe that the depressed valuations of many of
these companies now reflect an overly pessimistic view of their long-term
profit potential. During 1998, we have gradually increased the Fund's holdings
in these industries--both adding to existing positions as well as purchasing
new commitments. The Fund is invested in companies which are financially
strong and dominant in their business sectors--companies such as Alcoa, Dow
Chemical, Federal Express, Deere and others--yet which have relatively low
valuations. These are companies which meet the criteria of our disciplined
investment approach and which we believe offer attractive investment
opportunity over the long term. We are reminded of the quote from the flyleaf
of Graham & Dodd's classic book on investing, Security Analysis:
-----------------

"Many shall be restored that are now fallen and many shall fall that now are in
honor."
Horace--Ars Poetica.

Volatility in Finance Sector

We are also beginning to find more attractive values in financial services. In
the midst of weak global equity markets, stock prices in the finance sector
have been hit particularly hard, as investors are concerned about exposure to
foreign loans and hedge funds. For example, Citicorp (renamed Citigroup, after
the completion of its merger with Travelers) was recently down more than 50%
from its peak price earlier this year. As with the industrial companies, the
short-term impact of the world financial turmoil is real. Yet we believe that
the U.S. banking system is in strong enough shape to absorb the losses from
Russian debt, hedge funds and other emerging market investments. In fact,
after years of strong profits in the 1990s, most U.S. financial institutions
have record amounts of equity capital. Some of these companies have virtually
no exposure to foreign lending or emerging market trading, yet their stock
prices are down significantly along with the others in the group. We believe
that this dramatic and perhaps indiscriminate selling may be creating
attractive opportunities in the finance area. During the most recent quarter,
we took advantage of price weakness to add to the Fund's holdings in Republic
New York and St. Paul Companies, and we are actively evaluating additional
investment alternatives.

Conclusion

In closing, thank you for your continued investment in the Dodge & Cox Stock
Fund. Our firm has been through similar periods of disappointing equity
performance before, most recently 1990 - 1991. Our persistence and patience
ultimately benefited our shareholders, creating competitive investment returns
in the ensuing years. Of course, there can be no assurance that this will be
repeated in the future. Although our convictions are being tested again, we
believe that it is more important than ever to maintain our price discipline
and long-term, research-based approach.

Please write or call with your questions and comments.

For the Board of Trustees,

/s/ Harry R. Hagey, Chairman /s/ John A. Gunn, President
- ----------------------------- -----------------------------
Harry R. Hagey, Chairman John A. Gunn, President

October 30, 1998

Objective The Fund's primary objective is to provide shareholders
with an opportunity for long-term growth of principal and
income. A secondary objective is to achieve a reasonable
current income.

Strategy The Fund seeks to achieve these objectives by investing in
well-established companies which, in the view of Dodge &
Cox, have positive earnings prospects not reflected in the
current price. Dodge & Cox makes a conscious effort to
maintain representation in major economic sectors and areas
with strong long-term profit potential. The strategy is
based on a long-term investment horizon and, as a result,
portfolio turnover tends to be low.

20 Years of Investment Performance through September 30, 1998
- --------------------------------------------------------------------------------

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Dodge & Cox S & P 500
Stock Fund Index
---------- ---------
<S> <C> <C>
9/30/1978 10,000 10,000
9/30/1979 11,367 11,257
9/30/1980 13,822 13,634
9/30/1981 13,926 13,237
9/30/1982 15,410 14,535
9/30/1983 22,890 20,982
9/30/1984 23,328 21,978
9/30/1985 28,086 25,172
9/30/1986 36,616 33,170
9/30/1987 55,083 47,581
9/30/1988 48,739 41,697
9/30/1989 62,022 55,452
9/30/1990 54,851 50,325
9/30/1991 70,980 66,011
9/30/1992 76,619 73,304
9/30/1993 95,012 82,823
9/30/1994 101,391 85,874
9/30/1995 130,014 111,416
9/30/1996 151,514 134,061
9/30/1997 215,077 188,254
9/30/1998 197,113 205,309
</TABLE>

<TABLE>
<CAPTION>
Average annual total return for
periods ended September 30, 1998 1 Year 5 Years 10 Years 20 Years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Stock Fund -8.35% 15.71% 14.99% 16.08%
S&P 500 Index 9.06 19.91 17.28 16.31
</TABLE>

The chart covers the period from October 1, 1978 to September 30, 1998. It
compares a $10,000 investment made in the Dodge & Cox Stock Fund to a $10,000
investment made in the Standard & Poor's 500 Stock (S&P 500) Index. The Fund's
total returns include the reinvestment of dividend and capital gain
distributions. The S&P 500 Index is a broad based, unmanaged measure of common
stocks. Index returns include dividends and, unlike Fund returns, do not reflect
fees and expenses. Past performance does not guarantee future results.
Investment return and share price will fluctuate with market conditions, and
investors may have a gain or a loss when shares are sold.

Investment Manager: Dodge & Cox, San Francisco. Managed by the Investment Policy
Committee, whose eight members' average tenure at Dodge & Cox is 20 years.

<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]

<S> <C>
Stocks: 95.5%
Short-Term Investments: 4.5%
</TABLE>

<TABLE>
<CAPTION>
Stock Characteristics
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 75
Median Market Capitalization 7.0 billion
Price to Earnings Ratio* 17.5x
Price to Book Value 2.5x
Foreign Stocks** (as percentage of Fund) 10%
</TABLE>

<TABLE>
<CAPTION>
Ten Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 11.5
Electronics & Computer 8.9
Banking 7.5
Consumer Products 6.6
Electric & Gas Utilities 6.4
Transportation 5.9
Insurance & Financial Services 5.8
Capital Equipment 5.8
Consumer Durables 5.7
Retail & Distribution 5.6
</TABLE>

<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Pharmacia & Upjohn 2.8
Aluminum Co. of America 2.7
General Motors 2.7
Union Pacific 2.6
Dow Chemical 2.4
Amerada Hess 2.2
Motorola 2.1
FDX Corp. 2.0
Kmart 2.0
News Corp. 1.9
</TABLE>

* Price to earnings ratio is calculated using trailing 12-month earnings and
excludes extraordinary items.
** All U.S. Dollar-denominated.

<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1998
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS: 93.5%

CONSUMER: 20.2%
CONSUMER PRODUCTS: 6.6%
Sony Corp. ADR.................................................... 1.7
Matsushita Electric Industrial Co., Ltd. ADR...................... 1.6
Fort James Corp................................................... 1.6
Dole Food Co., Inc................................................ 0.9
Bausch & Lomb, Inc................................................ 0.8

CONSUMER DURABLES: 5.7%
General Motors Corp............................................... 2.7
Ford Motor Co..................................................... 1.6
Whirlpool Corp.................................................... 1.4

RETAIL AND DISTRIBUTION: 5.5%
Kmart Corp........................................................ 2.0
Nordstrom, Inc.................................................... 1.3
Genuine Parts Co.................................................. 1.2
Dillard's, Inc. Class A........................................... 0.9
Fleming Cos., Inc................................................. 0.1

MEDIA, PRINTING, AND ENTERTAINMENT: 2.4%
R.R. Donnelley & Sons Co.......................................... 1.8
Dow Jones & Co.................................................... 0.6

BASIC INDUSTRY: 15.4%
PAPER AND FOREST PRODUCTS: 5.2%
Weyerhaeuser Co................................................... 1.8
International Paper Co............................................ 1.7
Champion International Corp....................................... 1.2
Boise Cascade Corp................................................ 0.5

METALS AND MINING: 4.7%
Aluminum Co. of America........................................... 2.7
Rio Tinto Plc..................................................... 1.9
Rio Tinto Limited................................................. 0.1

CHEMICALS: 4.5%
Dow Chemical Co................................................... 2.4
Eastman Chemical Co............................................... 1.0
Nalco Chemical Co................................................. 0.6
Union Carbide Corp................................................ 0.2
Lubrizol Corp..................................................... 0.2
NOVA Corp......................................................... 0.1

GENERAL MANUFACTURING: 1.0%
Archer Daniels Midland Co......................................... 1.0

FINANCE: 13.3%
BANKING: 7.5%
Citicorp.......................................................... 1.9
Republic New York Corp............................................ 1.5
Golden West Financial Corp........................................ 1.5
Norwest Corp...................................................... 1.4
BankAmerica Corp.................................................. 1.2

INSURANCE AND FINANCIAL SERVICES: 5.8%
The St. Paul Cos., Inc............................................ 1.7
Loews Corp........................................................ 1.6
American Express Co............................................... 1.5
Chubb Corp........................................................ 1.0

ENERGY: 11.5%
Amerada Hess Corp................................................. 2.2
Phillips Petroleum Co............................................. 1.7
Occidental Petroleum Corp......................................... 1.7
Chevron Corp...................................................... 1.6
Unocal Corp....................................................... 1.4
Union Pacific Resources Group, Inc................................ 1.2
Royal Dutch Petroleum Co.......................................... 0.9
Baker Hughes, Inc................................................. 0.8

ELECTRONICS AND COMPUTER: 8.9%
Motorola, Inc..................................................... 2.1
Hewlett-Packard Co................................................ 1.5
International Business Machines Corp.............................. 1.4
Electronic Data Systems........................................... 1.4
NCR Corp.......................................................... 1.2
National Semiconductor Corp....................................... 0.8
Adobe Systems, Inc................................................ 0.4
Sybase, Inc....................................................... 0.1

ELECTRIC AND GAS UTILITIES: 6.4%
Central & South West Corp......................................... 1.6
Texas Utilities Co................................................ 1.4
FPL Group, Inc.................................................... 1.3
Wisconsin Energy Corp............................................. 1.0
TransCanada PipeLines Ltd......................................... 0.7
Edison International.............................................. 0.4

TRANSPORTATION: 5.9%
Union Pacific Corp................................................ 2.6
FDX Corp.......................................................... 2.0
Canadian Pacific Ltd.............................................. 1.3
</TABLE>

Portfolio of Investments September 30, 1998
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS (Continued)
CAPITAL EQUIPMENT: 5.8%
Deere & Co. ...................................................... 1.9
Lockheed Martin Corp. ............................................ 1.4
Caterpillar, Inc. ................................................ 1.3
Fluor Corp. ...................................................... 1.2

HEALTHCARE AND PHARMACEUTICAL: 3.4%
Pharmacia & Upjohn, Inc. ......................................... 2.8
First Health Group Corp. ......................................... 0.6

DIVERSIFIED TECHNOLOGY: 2.7%
Xerox Corp. ...................................................... 1.0
Corning, Inc. .................................................... 0.8
Raychem Corp. .................................................... 0.6
Unova, Inc. ...................................................... 0.3

PREFERRED STOCKS: 2.0%

CONSUMER: 2.0%
News Corp. Ltd., Limited Voting Ordinary Shares ADR ............. 1.9
Kmart Financing I, 7 3/4% Trust Convertible Preferred ........... 0.1

SHORT-TERM INVESTMENTS: 5.8%

OTHER ASSETS LESS LIABILITIES: (1.3)%

TOTAL NET ASSETS: 100.0%
</TABLE>

General Information
---------------------------------------------------------------

Investment Since 1930, Dodge & Cox has been providing professional
Manager investment management for individuals, trustees, corporations,
pension and profit-sharing funds, and charitable institutions.
Dodge & Cox manages the Dodge & Cox Stock Fund, the Dodge & Cox
Balanced Fund and the Dodge & Cox Income Fund.

No-Load Fund Shares of the Fund are purchased and redeemed at net asset
value. There are no sales, redemption or Rule 12b-1 plan
distribution charges.

Gifts Fund shares provide a convenient method for making gifts to
children and to other family members. Shares may be held by an
adult custodian for the benefit of a minor under a Uniform
Gifts/Transfers to Minors Act. Trustees and guardians may also
hold shares for a minor's benefit.

Automatic Shareholders may make regular monthly or quarterly
Investment Plan investments of $100 or more through automatic deductions from
their bank accounts.

Withdrawal Plan Shareholders owning $10,000 or more of the Fund's shares may
elect to receive periodic monthly or quarterly payments of at
least $50.

Reinvestment Shareholders may direct that dividend and capital gains
Plan distributions be reinvested in additional Fund shares.

The above plans are completely voluntary and involve no service
charge of any kind.

IRA Plan The Fund has a Regular and Roth Individual Retirement Account
Plan (IRA) available for shareholders of the Fund.

- --------------------------------------------------------------------------------

PREPARING FOR THE YEAR 2000

The Fund's key service providers--Dodge & Cox, the investment manager; Boston
Financial Data Services Inc., the transfer agent; and State Street Bank and
Trust Company, the custodian--are updating their computer systems to process
date-related information properly following the turn of the century. In some
cases, testing with business partners, vendors and other service providers is
already under way. We will continue to keep you up-to-date in the Fund's
shareholder reports. If you would like more detailed information visit the
Funds' web site at www.dodgeandcox.com.

- --------------------------------------------------------------------------------

D O D G E & C O X D O D G E & C O X
- ----------------- -----------------
Balanced Fund

Balanced Fund
Established 1931

Investment Managers -----------------
Dodge & Cox
One Sansome Street -----------------
35th Floor
San Francisco
California 94104-4405
(415) 981-1710

For Fund literature and
information, please visit the
Funds' web site at:

www.dodgeandcox.com

or write or call:

Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston
Massachusetts 02205-9051

(800) 621-3979
- -----------------

This report is submitted
for the general information
of the shareholders of the
Fund. The report is not Third Quarter Report
authorized for distribution September 30, 1998
to prospective investors
in the Fund unless it is 1998
accompanied by an effective -----------------
prospectus. -----------------
- ----------------- -----------------

Printed on recycled paper.
9/98 BF QR
<PAGE>

To Our Shareholders
- --------------------------------------------------------------------------------

The Dodge & Cox Balanced Fund had a total return of -7.9% for the quarter ended
September 30, 1998 and -1.7% for the first nine months of 1998. This result
compares with total returns of -4.2% and +7.5% for the Combined Index* over the
same respective time periods. Longer-term results of the Fund appear on page
three of this report.

On September 30, 1998, total net assets in the Fund were $5.4 billion. At
quarter end, the asset allocation was 56% in stocks, 40% in bonds, and 4% in
cash equivalents.

As can be seen from the results above, this has been a difficult period for the
Balanced Fund. Recent months have been a time of unprecedented developments:
global economies continue unsettled and the U.S. equity and fixed-income
markets have been volatile in the face of this global uncertainty. In this
context, returns of the equity portion of the Balanced Fund have been
disappointing, especially when compared to the total return of the S&P 500.

Return Disparities in the S&P 500

In this environment of continually shifting expectations, it is no surprise
that the stock market has been unusually volatile. Furthermore, while the
return for the S&P 500 remained positive for the first nine months of the year,
strong investment returns were concentrated in a very narrow group of large,
high-profile companies. More than ninety percent of the S&P 500's total return
came from ten companies alone, which on average had price increases of 74% for
the nine month period ended September 30. Most of these companies have two
things in common: they are viewed by many investors as relatively "safe" from
an economic slowdown, and they already had relatively high valuations even at
the start of the year. Conversely, stock prices were weak for a broad number of
companies, as the remaining 490 companies in the S&P 500 had an average price
decline of about 4% for the same period.

The slightly negative performance of the Fund this year clearly reflects this
disparity in equity investment results. If one did not own the "top ten"
stocks, year-to-date portfolio returns were probably disappointing when
compared with the S&P 500. Consistent with our longstanding "price-disciplined"
approach, we have not invested in higher valuation companies. We continue to be
skeptical that these companies can maintain their rapid growth and high
profitability to the degree that other investors appear to expect.

Our Investment Discipline: Staying the Course

Current Equity Portfolio Strategy

* The Combined Index reflects an unmanaged portfolio of 60% of the S&P 500 and
40% of the Lehman Brothers Aggregate Bond Index (LBAG).

- --------------------------------------------------------------------------------
companies now reflect an overly pessimistic view of their long-term profit
potential. During 1998, we have gradually increased the Fund's holdings in
these industries both adding to existing positions as well as purchasing new
commitments. The Fund is invested in companies which are financially strong and
dominant in their business sectors companies such as Alcoa, Dow Chemical,
Federal Express, Deere and others yet which have relatively low valuations.

Flight-to-Quality Favors U.S. Treasury Total Returns

Interest rates fell dramatically in the third quarter, as protracted weakness
in many emerging economies raised concern of a slowdown in domestic growth.
Investors, perceiving greater uncertainty in corporate earnings and in
mortgage prepayments, sought a haven in risk-free U.S. Treasury securities.
As a result, the yield on the benchmark 30-year U.S. Treasury fell 66 basis
points to 4.97% (one basis point is equal to 1/100 of 1%). Short maturities
experienced even sharper declines. Anticipated rate reduction moves by the
Federal Reserve helped fuel the drop in short rates, and, in September, the
Federal Open Market Committee announced its intention to lower the target
Federal Funds rate (the interest rate at which banks lend to each other to
meet reserve requirements) by 25 basis points to 5.25%.

On an absolute basis, the Fund benefited from the decline in rates; however,
performance of the fixed-income portfolio modestly lagged that of the LBAG
due to the Fund's overweight positions in non-Treasury sectors of the market,
including corporate and mortgage-backed securities. To illustrate the
disparity between sector returns, the Lehman Brothers Treasury Index returned
5.7% for the third quarter, while the Corporate Index returned 3.6% and the
Mortgage Index returned 2.6%. The Fund's slightly lower sensitivity to
interest rates, as measured by its duration relative to that of the LBAG,
also detracted from relative performance. The fixed income portion of the
Fund benefited from a slightly higher yield than the LBAG.

Maintaining a Long-Term Fixed-Income Perspective

We continue to believe that the best way to outperform the broad fixed-income
market over time is to build a higher-yielding portfolio than the market
index. We attempt to do so through careful, independent research of the
credit fundamentals and structural characteristics of each investment. A key
element of this investing philosophy is the ability to maintain a long-term
investment perspective. Price gains or losses can sometimes dominate total
return over short time periods (as sector-specific price gains did in the
third quarter), yet income and the reinvestment of income are the most
important contributors to the total return of fixed-income portfolios over
long time periods. Thus, we will continue to overweight the corporate and
mortgage-backed sectors relative to the LBAG in our efforts to improve the
long-term total return prospects of the fixed-income portion of the Fund.

Conclusion

In closing, thank you for your continued investment in the Dodge & Cox Balanced
Fund. Our firm has been through similar periods of disappointing equity
performance before, most recently 1990 - 1991. Our persistence and patience
ultimately benefited our shareholders, creating competitive investment returns
in the ensuing years. Of course, there can be no assurance that this will be
repeated in the future. Although our convictions are being tested again, we
believe that it is more important than ever to maintain our price discipline
and long-term, research-based approach.

Please write or call with your questions and comments.

For the Board of Trustees,

/s/ Harry R. Hagey
------------------------
October 30, 1998 Harry R. Hagey, Chairman

Objective The Fund's objectives are to provide shareholders with regular
income, conservation of principal and an opportunity for long-
term growth of principal and income.

Strategy The Fund seeks to achieve these objectives by investing in a
diversified portfolio of common stocks, preferred stocks and
bonds.

Stocks: The Fund invests in well-established companies which,
in the view of Dodge & Cox, have positive earnings prospects
not reflected in the current price. Dodge & Cox makes a
conscious effort to maintain representation in major economic
sectors and areas with strong long-term profit potential. The
Fund will hold no more than 75% of its total assets in stocks.

Bonds: Dodge & Cox constructs a diversified portfolio of high-
quality bonds, while striving to maintain the fixed-income
yield higher than that of the broad bond market. Fixed-income
securities in the Fund will generally include U.S. Treasury,
mortgage-related and corporate issues.

20 Years of Investment Performance through September 30, 1998
- -------------------------------------------------------------------------------

[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dodge & Cox
S&P 500 Combined Balanced
Index LBAG Index Index Fund
------- ---------- -------- -----------
<S> <C> <C> <C> <C>
9/30/1978 10,000 10,000 10,000 10,000
9/30/1979 11,257 10,369 10,914 11,062
9/30/1980 13,634 10,182 12,212 12,344
9/30/1981 13,237 9,916 11,904 12,062
9/30/1982 14,535 13,408 14,239 14,492
9/30/1983 20,982 15,499 18,832 18,840
9/30/1984 21,978 16,860 20,065 19,344
9/30/1985 25,172 20,572 23,597 23,262
9/30/1986 33,170 24,744 30,066 29,659
9/30/1987 47,581 24,812 37,478 38,501
9/30/1988 41,697 28,111 36,813 36,999
9/30/1989 55,452 31,279 45,648 45,022
9/30/1990 50,325 33,640 44,453 43,367
9/30/1991 66,011 39,023 55,601 54,095
9/30/1992 73,304 43,924 62,163 60,251
9/30/1993 82,823 48,306 69,517 71,536
9/30/1994 85,874 46,746 70,151 73,903
9/30/1995 111,416 53,321 86,484 90,807
9/30/1996 134,061 55,921 98,589 101,775
9/30/1997 188,254 61,367 125,727 131,358
9/30/1998 205,309 68,425 139,095 129,393

</TABLE>

Average annual total return for
periods ended September 30, 1998 1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dodge & Cox Balanced Fund -1.53% 12.57% 13.33% 13.65%
Combined Index 10.63 14.89 14.22 14.07
S&P 500 Index 9.06 19.91 17.28 16.31
Lehman Brothers Aggregate Bond Index 11.50 7.21 9.30 10.09
</TABLE>

The chart covers the period from October 1, 1978 to September 30, 1998. It
compares a $10,000 investment made in the Dodge & Cox Balanced Fund to $10,000
investments made in the Standard & Poor's 500 Stock (S&P 500) Index, the Lehman
Brothers Aggregate Bond (LBAG) Index and a combined index. The Fund's total
returns include the reinvestment of dividend and capital gain distributions. The
S&P 500 Index is a broad-based, unmanaged measure of common stocks. The LBAG
Index is a broad-based, unmanaged measure of investment grade-rated corporate
anD U.S. government fixed-income securities. The Combined Index reflects an
unmanaged portfolio of 60% of the S&P 500 Index and 40% of the LBAG Index. The
Fund may, however, invest up to 75% of its total assets in stocks. Index
returns include dividends and/or interest income, and unlike fund returns, do
not reflect fees or expenses. Past performance does not guarantee future
results. Investment return and share price will fluctuate with market
conditions, and investors may have a gain or loss when shares are sold.

<PAGE>

Fund Information September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $63.34
Total Net Assets (millions) $5,397
30 Day SEC Yield/1/ 3.38%
1997 Expense Ratio 0.55%
1997 Portfolio Turnover 32%
Fund Inception Date 1931
</TABLE>
Investment Manager: Dodge & Cox, San Francisco. Managed by
the Investment Policy Committee, whose eight members'
average tenure at Dodge & Cox is 20 years, and by the
Fixed-Income Strategy Committee, whose ten members' average
tenure is 12 years.

<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 40.4%
Stocks: 56.1%
Short-Term Investments: 3.5%
</TABLE>

<TABLE>
<CAPTION>
Stock Portfolio (56.1% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Stocks 76
Median Market Capitalization $7.1 billion
Price to Earnings Ratio/2/ 17.5x
Price to Book Value 2.5x
Foreign Stocks/3/ (as percentage of Fund) 6%
</TABLE>

<TABLE>
<CAPTION>
Five Largest Sectors % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Energy 6.8
Electronics & Computer 5.4
Banking 4.6
Consumer Products 3.9
Electric & Gas Utilities 3.6
</TABLE>

<TABLE>
<CAPTION>
Ten Largest Stock Holdings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
Aluminum Co. of America 1.6
General Motors 1.6
Pharmacia & Upjohn 1.6
Union Pacific 1.6
Dow Chemical 1.3
Amerada Hess 1.3
Motorola 1.3
Citicorp 1.2
FDX Corp. 1.1
News Corp. 1.1
</TABLE>

<TABLE>
<CAPTION>
Bond Portfolio (40.4% of Fund)
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 126
Average Quality AA+
Average Maturity 9.1 years
Effective Duration 4.11 years
</TABLE>

<TABLE>
<CAPTION>
Moody's/Standard & Poor's Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 25.2
Aaa/AAA 1.6
Aa/AA 1.4
A/A 7.0
Baa/BBB 5.2
Ba/BB 0.0
</TABLE>

<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 9.1
Federal Agency CMO and REMIC+ 9.5
Federal Agency Mortgage Pass-Through 6.5
Asset-Backed 1.1
Corporate 12.4
Foreign (U.S. Dollar-denominated) 1.8

+Collateralized Mortgage Obligation and Real Estate Mortgage Investment Conduit
</TABLE>

/1/ An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.
/2/ Price to earnings ratio is calculated using trailing 12-month earnings and
excludes extraordinary items.
/3/ All U.S. Dollar-denominated.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4
<PAGE>

<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1998
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
COMMON STOCKS: 54.9%

CONSUMER: 11.8%
CONSUMER PRODUCTS: 3.9%
Sony Corp. ADR.................................................. 1.0
Matsushita Electric Industrial Co., Ltd. ADR.................... 1.0
Fort James Corp................................................. 0.9
Dole Food Co., Inc.............................................. 0.5
Bausch & Lomb, Inc.............................................. 0.5

CONSUMER DURABLES: 3.3%
General Motors Corp............................................. 1.6
Ford Motor Co................................................... 1.0
Whirlpool Corp.................................................. 0.7

RETAIL AND DISTRIBUTION: 3.2%
Kmart Corp...................................................... 1.1
Nordstrom, Inc.................................................. 0.8
Genuine Parts Co................................................ 0.6
Dillard's, Inc. Class A......................................... 0.6
Fleming Cos., Inc............................................... 0.1

MEDIA, PRINTING, AND ENTERTAINMENT: 1.4%
R.R. Donnelley & Sons Co........................................ 1.0
Dow Jones & Co.................................................. 0.4

BASIC INDUSTRY: 9.0%
PAPER AND FOREST PRODUCTS: 3.0%
Weyerhaeuser Co.................................................. 1.1
International Paper Co........................................... 0.9
Champion International Corp...................................... 0.7
Boise Cascade Corp............................................... 0.3

METALS AND MINING: 2.8%
Aluminum Co. of America.......................................... 1.6
Rio Tinto Plc.................................................... 1.1
Rio Tinto Limited................................................ 0.1

CHEMICALS: 2.6%
Dow Chemical Co.................................................. 1.3
Eastman Chemical Co.............................................. 0.6
Nalco Chemical Co................................................ 0.4
Union Carbide Corp............................................... 0.1
NOVA Corp........................................................ 0.1
Lubrizol Corp.................................................... 0.1

GENERAL MANUFACTURING: 0.6%
Archer Daniels Midland Co........................................ 0.6

FINANCE: 8.1%
BANKING: 4.6%
Citicorp......................................................... 1.2
Golden West Financial Corp....................................... 1.0
Republic New York Corp........................................... 0.9
Norwest Corp..................................................... 0.8
BankAmerica Corp................................................. 0.7

INSURANCE AND FINANCIAL SERVICES: 3.5%
The St. Paul Cos., Inc........................................... 1.0
Loews Corp....................................................... 1.0
American Express Co.............................................. 0.9
Chubb Corp....................................................... 0.6

ENERGY: 6.8%
Amerada Hess Corp................................................ 1.3
Occidental Petroleum Corp........................................ 1.0
Phillips Petroleum Co............................................ 0.9
Chevron Corp..................................................... 0.9
Unocal Corp...................................................... 0.8
Union Pacific Resources Group, Inc............................... 0.6
Royal Dutch Petroleum Co......................................... 0.5
Baker Hughes, Inc................................................ 0.5
Amoco Corp....................................................... 0.3

ELECTRONICS AND COMPUTER: 5.4%
Motorola, Inc.................................................... 1.3
Hewlett-Packard Co............................................... 0.9
Electronic Data Systems.......................................... 0.9
International Business Machines Corp............................. 0.8
NCR Corp......................................................... 0.7
National Semiconductor Corp...................................... 0.5
Adobe Systems, Inc............................................... 0.2
Sybase, Inc...................................................... 0.1

ELECTRIC AND GAS UTILITIES: 3.6%
Central & South West Corp........................................ 0.9
Texas Utilities Co............................................... 0.7
FPL Group, Inc................................................... 0.7
Wisconsin Energy Corp............................................ 0.6
TransCanada PipeLines Ltd........................................ 0.4
Edison International............................................. 0.3

TRANSPORTATION: 3.5%
Union Pacific Corp............................................... 1.6
FDX Corp......................................................... 1.1
Canadian Pacific Ltd............................................. 0.8
</TABLE>

<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1998
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>

COMMON STOCKS (Continued)
CAPITAL EQUIPMENT: 3.3%
Deere & Co........................................................ 1.0
Lockheed Martin Corp.............................................. 0.8
Caterpillar, Inc.................................................. 0.8
Fluor Corp........................................................ 0.7

HEALTHCARE AND PHARMACEUTICAL: 1.9%
Pharmacia & Upjohn, Inc........................................... 1.6
First Health Group Corp........................................... 0.3

DIVERSIFIED TECHNOLOGY: 1.5%
Xerox Corp........................................................ 0.5
Raychem Corp...................................................... 0.4
Corning, Inc...................................................... 0.4
Unova, Inc........................................................ 0.2

PREFERRED STOCKS: 1.2%

CONSUMER: 1.2%
News Corp. Ltd., Limited Voting Ordinary Shares ADR............... 1.1
Kmart Financing I, 7 3/4% Trust Convertible Preferred............. 0.1

BONDS: 40.4%

U.S. TREASURY AND GOV'T AGENCY: 9.1%

FEDERAL AGENCY CMO* AND REMIC**: 9.5%

FEDERAL AGENCY MTG PASS-THROUGH: 6.5%

ASSET-BACKED SECURITIES: 1.1%
CA Infrastructure and Econ. Dev. Bank SP Trust PGE-1
Rate Reduction Ctf. 1997-1 A-5 6.25%, 6/25/2004.................. 0.7
CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1
Rate Reduction Ctf. 1997-1 A-6 6.38%, 9/25/2008.................. 0.4

CORPORATE: 12.4%
FINANCE: 6.2%
Norwest Corp., various securities................................. 1.4
Golden West Financial, various securities......................... 0.8
Ford Motor Credit Co. Global Notes 7.20%, 6/15/2007............... 0.8

FINANCE (continued)
GMAC Put Notes 8.875%, 6/1/2010................................... 0.7
J.P. Morgan Capital Trust I 7.54%, 1/15/2027...................... 0.5
GMAC Global Notes 6.125%, 1/22/2008............................... 0.4
Citicorp Capital Trust I 7.933%, 2/15/2027........................ 0.4
BankAmerica Capital II 8.00%, 12/15/2026.......................... 0.4
Safeco Corp. Notes 6.875%, 7/15/2007.............................. 0.3
Hartford Financial Services Group, various securities............. 0.3
First Nationwide Bank Sub. Debentures 10.00%, 10/1/2006........... 0.1
CIGNA Corp., various securities................................... 0.1
Barclays No. American Capital 9.75%, 5/15/2021.................... 0.0

INDUSTRIAL: 5.7%
Raytheon Co., various securities.................................. 1.3
Lockheed Martin Corp., various securities......................... 1.3
Dayton Hudson Corp., various securities........................... 1.3
Time Warner Ent. Sr. Debentures 8.375%, 7/15/2033................. 0.6
May Department Stores, various securities......................... 0.6
Walt Disney Co. Debentures 7.55%, 7/15/2093....................... 0.5
Union Camp Corp. Debentures 9.25%, 2/1/2011....................... 0.1

TRANSPORTATION: 0.5%
Consolidated Rail Corp., various securities....................... 0.5

UTILITIES: 0.0%
Idaho Power Co. 1st Mtge. Bonds 9.50%, 1/1/2021................... 0.0

FOREIGN (U.S. DOLLAR-DENOMINATED): 1.8%

CANADIAN CORPORATE: 1.3%
Hydro-Quebec, various securities.................................. 0.9
Canadian Pacific Ltd. 9.45%, 8/1/2021............................. 0.2
Canadian National Railway Co. 6.80%, 7/15/2018.................... 0.2

INTERNATIONAL AGENCY: 0.5%
Inter-American Development Bank 7.125%, 3/15/2023................. 0.4
European Investment Bank 10.125%, 10/1/2000....................... 0.1

SHORT-TERM INVESTMENTS: 2.8%

OTHER ASSETS LESS LIABILITIES: 0.7%

TOTAL NET ASSETS: 100.0%
</TABLE>

* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit

General Information
------------------------------------------------------------

Manager Since 1930, Dodge & Cox has been providing professional
Investment investment management for individuals, trustees,
corporations, pension and profit-sharing funds, and
charitable institutions. Dodge & Cox manages the Dodge & Cox
Balanced Fund, the Dodge & Cox Stock Fund and the Dodge &
Cox Income Fund.

No-Load Fund Shares of the Fund are purchased and redeemed at net asset
value. There are no sales, redemption or Rule 12b-1 plan
distribution charges.

Gifts Fund shares provide a convenient method for making gifts to
children and to other family members. Shares may be held by
an adult custodian for the benefit of a minor under a
Uniform Gifts/Transfers to Minors Act. Trustees and
guardians may also hold shares for a minor's benefit.

Automatic Shareholders may make regular monthly or quarterly
Investment Plan investments of $100 or more through automatic deductions
from their bank accounts.

Withdrawal Plan Shareholders owning $10,000 or more of the Fund's shares may
elect to receive periodic monthly or quarterly payments of
at least $50.

Reinvestment Shareholders may direct that dividend and capital gains
Plan distributions be reinvested in additional Fund shares.

The above plans are completely voluntary and involve no
service charge of any kind.

IRA Plan The Fund has a Regular and Roth Individual Retirement
Account Plan (IRA) available for shareholders of the Fund.

- --------------------------------------------------------------------------------
PREPARING FOR THE YEAR 2000
The Fund's key service providers--Dodge & Cox, the investment manager; Boston
Financial Data Services Inc., the transfer agent; and State Street Bank and
Trust Company, the custodian--are updating their computer systems to process
date-related information properly following the turn of the century. In some
cases, testing with business partners, vendors and other service providers is
already under way. We will continue to keep you up-to-date in the Fund's
shareholder reports. If you would like more detailed information visit the
Funds' web site at www.dodgeandcox.com.
- --------------------------------------------------------------------------------

The financial information has been taken from the records of the Fund and has
not been audited by our independent accountants who do not express an opinion
thereon. The financial statements of the Fund will be subject to audit by our
independent accountants as of the close of the calendar year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

D O D G E & C O X D O D G E & C O X
- ----------------- -----------------
Income Fund

Income Fund
Established 1989
Investment Managers
Dodge & Cox -----------------
One Sansome Street
35th Floor -----------------
San Francisco
California 94104-4405
(415) 981-1710

For Fund literature and
information, please visit the
Funds' web site at:

www.dodgeandcox.com

or write or call:

Dodge & Cox Funds
c/o BFDS
P.O. Box 9051
Boston
Massachusetts 02205-9051
(800) 621-3979
- -----------------

This report is submitted
for the general information
of the shareholders of the Third Quarter Report
Fund. The report is not September 30, 1998
authorized for distribution
to prospective investors 1998
in the Fund unless it is
accompanied by an effective -----------------
prospectus. -----------------
- ----------------- -----------------

Printed on recycled paper.
9/98 IF QR

<PAGE>

To Our Shareholders
- --------------------------------------------------------------------------------

The Dodge & Cox Income Fund earned a total return of 3.1% for the quarter
ended September 30, 1998 and 7.1% for the first nine months of 1998. This
compared to total returns of 4.2% and 8.3%, respectively, for the Lehman
Brothers Aggregate Bond Index (LBAG), a broad-based index composed of
investment grade bonds. Average annual returns for longer time periods are
summarized on page three of this report. On September 30, total net assets in
the Fund were $928 million.

Interest Rates Fall Amid Continued Weakness in Foreign Markets

Interest rates fell dramatically in the third quarter as protracted weakness
in many emerging economies raised concern of a slowdown in domestic growth.
Investors, perceiving greater uncertainty in corporate earnings and in
mortgage prepayments, sought a haven in risk-free U.S. Treasury securities. As
a result, the yield on the benchmark 30-year U.S. Treasury fell 66 basis
points (one basis point is equal to 1/100 of 1%) to 4.97%. Short maturities
experienced even sharper declines: yields on benchmark two-year and five-year
U.S. Treasuries fell 121 basis points and 124 basis points respectively,
ending the quarter at 4.27% and 4.22%. Anticipated rate reduction moves by the
Federal Reserve helped fuel the drop in short rates, and, in September, the
Federal Open Market Committee announced its intention to lower the target
Federal Funds rate (the interest rate at which banks lend to each other to
meet reserve requirements) by 25 basis points to 5.25%.

On an absolute basis, the Fund benefited from the decline in rates;
performance, however, lagged that of the LBAG due to the Fund's overweight
positions in non-Treasury sectors of the market, including corporate and
mortgage-backed securities. To illustrate the disparity between sector
returns, the Lehman Brothers Treasury Index returned 5.7% for the third
quarter, while the Corporate Index returned 3.6% and the Mortgage Index
returned 2.6%. The Fund's slightly lower sensitivity to interest rates, as
measured by its duration relative to that of the LBAG, also detracted from
relative performance. The Fund benefited from a slightly higher yield than
that of the LBAG.

Flight-to-Quality Favors U.S. Treasury Total Returns

With many investors focused on developments in troubled Asian economies,
Russia shocked financial markets in August by announcing its intention to
reschedule over $40 billion in ruble-denominated debt. The default provoked
renewed fears of global financial crisis, fostering concern that weakness
abroad could penetrate U.S. markets and cause a slowdown in domestic economic
growth. Capital markets responded swiftly; investors, perceiving generally
higher levels of risk, sold or avoided risk-bearing investments they might
previously have purchased or continued to hold. The "flight-to-quality" that
ensued, and the premium placed on liquidity, fueled a rapid decline in
Treasury yields (and an accompanying increase in Treasury prices) that left
all other sectors of the U.S. bond market behind. Yield premiums rose
significantly on securities as diverse as investment-grade corporate bonds,
Federal Agency mortgage-backed securities, Federal Agency debentures and high-
yield debt.

The negative impact on corporate securities was due in part to increased
uncertainty about future corporate earnings. Heightened concern about foreign
market exposure and the potential for slower domestic growth led to higher
corporate yield premiums, with finance, lower-rated, and foreign issues most
severely affected. Mortgage-backed securities also lagged Treasuries as the
significant decline in interest rates raised prepayment fears. Faster
prepayments would have a negative impact on total return in a declining
interest rate environment, since investors would be required to reinvest
increased principal cash flows at lower yields. Yield premiums for the sector
widened quickly and dramatically, affecting all mortgage-related securities to
some degree.

- --------------------------------------------------------------------------------
Importance of Maintaining a Long-Term Investment Perspective

We continue to believe that the best way to outperform the broad fixed-income
market over time is to build a higher-yielding portfolio than the market
index. We attempt to do so through careful, independent research of the credit
fundamentals and structural characteristics of each investment. A key element
of this investing philosophy is the ability to maintain a long-term investment
perspective. Price gains or losses can sometimes dominate total return over
short time periods (as sector-specific price gains did in the third quarter),
income and the reinvestment of income are the most important contributors to
the total return of fixed-income portfolios over long time periods. Thus, we
will continue to overweight the corporate and mortgage-backed sectors relative
to the LBAG in our efforts to improve the long-term total return prospects of
the Fund.

In the context of this strategy, we view the recent widening of yield premiums
as an opportunity to enhance the income component of the Fund's total return
relative to the LBAG and thus benefit relative performance over the long term.
For example, in August, we added $8.0 million par value to an existing
position of Time Warner Entertainment senior debentures due July 15, 2033 at a
yield of 7.33%, a yield premium of 192 basis points over a thirty-year
maturity U.S. Treasury. As recently as July 31, 1998, these securities were
bid at a yield premium of 137 basis points. In September, we purchased $6.45
million of Union Pacific Equipment Trust 98-B Certificates due January 2,
2019. These securities were purchased at a yield of 6.85%, or 207 basis points
higher than that of a comparable Treasury.

In Closing

Despite the short-term impact of strong Treasury demand on relative sector
performance, we remain committed to our long-term strategy for the Fund. We
continue to believe that overweighting the corporate and mortgage-backed
sectors through a process of independent fundamental research will offer fixed-
income investors an opportunity to outperform the market over the long term.

Thank you for your continued confidence in the Dodge & Cox Income Fund. As
always, we welcome your comments and questions.

For the Board of Trustees,

/s/ Harry R. Hagey /s/ A. Horton Shapiro
- ------------------------------ -------------------------------------------
Harry R. Hagey, Chairman A. Horton Shapiro, Executive Vice President

October 30, 1998

Objective The Fund's primary objective is to provide shareholders with
a high and stable rate of current income, consistent with
long-term preservation of capital. A secondary objective is
to take advantage of opportunities to realize capital
appreciation.

Strategy The Fund seeks to achieve these objectives by investing in a
diversified portfolio of primarily high-quality bonds and
other fixed-income securities, while striving to maintain the
Fund's yield higher than that of the broad bond market. Dodge
& Cox conducts thorough fundamental research on each of the
Fund's investments, taking many factors into consideration
including creditworthiness and structural characteristics.
Fixed-income securities in the Fund will generally include
U.S. Treasury, mortgage-related and corporate issues.

Investment Performance Since Inception through September 30, 1998
- --------------------------------------------------------------------------------

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Dodge & Cox LBAG
Income Fund Index
----------- ------
<S> <C> <C>
01/01/1989 10,000 10,000
12/31/1989 11,411 11,455
12/31/1990 12,256 12,482
12/31/1991 14,451 14,479
12/31/1992 15,581 15,550
12/31/1993 17,350 17,067
12/31/1994 16,848 16,568
12/31/1995 20,252 19,630
12/31/1996 20,988 20,339
12/31/1997 23,088 22,308
09/30/1998 24,731 24,162
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods 9.75 Years
ended September 30, 1998 1 Year 5 Years (Since Inception)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 10.45% 7.31% 9.73%
Lehman Brothers Aggregate Bond Index 11.50 7.21 9.47
</TABLE>

The chart covers the period from January 1, 1989 to September 30, 1998. It
compares a $10,000 investment made in the Dodge & Cox Income Fund to a $10,000
investment made in the Lehman Brothers Aggregate Bond (LBAG) Index. The Fund's
total returns include the reinvestment of dividend and capital gain
distributions. The LBAG Index is a broad-based unmanaged measure of investment
grade-rated corporate and U.S. Government fixed-income securities. Index
returns include interest income and, unlike Fund returns, do not reflect fees or
expenses. Past performance does not guarantee future results. Investment
return and share price will fluctuate with market conditions, and investors may
have a gain or loss when shares are sold.

Investment Manager: Dodge & Cox, San Francisco. Managed by the Fixed Income
Strategy Committee, whose ten members' average tenure at Dodge & Cox is 12
years, and by the Investment Policy Committee, whose eight members' average
tenure at Dodge & Cox is 20 years.

<TABLE>
<CAPTION>
Asset Allocation
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]

<S> <C>
Bonds: 96.4%
Short-Term Investments: 3.6%
</TABLE>

<TABLE>
<CAPTION>
Bond Characteristics
- --------------------------------------------------------------------------------
<S> <C>
Number of Bonds 100
Average Quality AA+
Average Maturity 9.7 years
Effective Duration 4.04 years
</TABLE>

<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 22.4
Federal Agency CMO and REMIC+ 19.9
Federal Agency Mortgage Pass-Through 18.7
Asset-Backed 1.9
Corporate 28.9
Foreign (U.S. Dollar-denominated) 4.6
Short-Term Investments 3.6
</TABLE>

+Collateralized Mortgage Obligation and
Real Estate Mortgage Investment Conduit

<TABLE>
<CAPTION>
Moody's/Standard & Poor's
Quality Ratings % of Fund
- --------------------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 60.9
Aaa/AAA 3.5
Aa/AA 2.9
A/A 17.3
Baa/BBB 11.8
Ba/BB 0.0
Short-Term Investments 3.6
</TABLE>

<TABLE>
<CAPTION>
Maturity Breakdown % of Fund
- --------------------------------------------------------------------------------
<S> <C>
0-1 Years to Maturity 11.9
1-5 45.1
5-10 18.6
10-15 3.5
15-20 2.6
20-25 9.1
25 and Over 9.2
</TABLE>

* An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.

<TABLE>
<CAPTION>
Portfolio of Investments September 30, 1998
- --------------------------------------------------------------------------------
Percentage of Fund
<S> <C>
BONDS: 96.4%
U.S. TREASURY AND GOV'T AGENCY: 22.4%

FEDERAL AGENCY CMO* AND REMIC**: 19.9%

FEDERAL AGENCY MTG. PASS-THROUGH: 18.7%

ASSET-BACKED SECURITIES: 1.9%
CA Infrastructure and Econ. Dev. Bank SP Trust PGE-1
Rate Reduction Cft. 1997-1 A-7 6.42%, 9/25/2008.................. 1.1
CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1
Rate Reduction Cft. 1997-1 A-2 6.14%, 3/25/2002.................. 0.8

CORPORATE: 28.9%
INDUSTRIAL: 13.2%
Raytheon Co., various securities.................................. 2.6
Lockheed Martin Corp., various securities......................... 2.4
Dayton Hudson Corp., various securities........................... 2.4
Time Warner Entertainment Sr. Debentures 8.375%, 7/15/2033........ 2.1
Walt Disney Co. Debentures 7.55%, 7/15/2093....................... 1.9
May Department Stores, various securities......................... 1.5
Union Camp Corp. Debentures 9.25%, 2/1/2011....................... 0.3

FINANCE: 11.6%
Norwest Corp., various securities................................. 2.7
Ford Motor Credit Co. Global Notes 7.20%, 6/15/2007............... 2.4
GMAC Put Notes 8.875%, 6/1/2010................................... 1.9
Hartford Financial Services Group, various securities............. 1.6
J.P. Morgan Capital Trust I 7.54%, 1/15/2027...................... 0.7
BankAmerica Capital II 8.00%, 12/15/2026.......................... 0.7
Citicorp Capital Trust I 7.933%, 2/15/2027........................ 0.6
First Nationwide Bank Sub. Debentures 10.00%, 10/1/2006........... 0.5
Citicorp Capital Trust II 8.015%, 2/15/2027....................... 0.2
Barclays No. American Capital 9.75%, 5/15/2021.................... 0.2
CIGNA Corp. 7.65%, 3/1/2023....................................... 0.1

TRANSPORTATION: 3.9%
Union Pacific Corp., various securities........................... 2.9
Consolidated Rail Corp. 9.75%, 6/15/2020.......................... 0.8
Seaboard Coast Line Railroad Equip. Tr. 11.25%, 3/1/1999.......... 0.1
Norfolk & Western Railroad Equip. Tr. 10.125%, 7/1/2000........... 0.1

UTILITIES: 0.2%
Idaho Power Co. 1st Mtge. Bonds 9.50%, 1/1/2021................... 0.2

FOREIGN (U.S. DOLLAR-DENOMINATED): 4.6%

CANADIAN CORPORATE: 3.1%
Hydro-Quebec, various securities.................................. 2.1
Canadian Pacific Ltd. 9.45%, 8/1/2021............................. 1.0

INTERNATIONAL AGENCY: 1.5%
Inter-American Development Bank 7.125%, 3/15/2023................. 1.0
European Investment Bank 10.125%, 10/1/2000....................... 0.5

SHORT-TERM INVESTMENTS: 2.3%

OTHER ASSETS LESS LIABILITIES: 1.3%

TOTAL NET ASSETS: 100.0%
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit

THIS PAGE INTENTIONALLY LEFT BLANK

General Information
---------------------------------------------------------------

Investment Since 1930, Dodge & Cox has been providing professional
Manager investment management for individuals, trustees, corporations,
pension and profit-sharing funds, and charitable institutions.
Dodge & Cox manages the Dodge & Cox Income Fund, the Dodge &
Cox Balanced Fund and the Dodge & Cox Stock Fund.

No-Load Fund Shares of the Fund are purchased and redeemed at net asset
value. There are no sales, redemption or rule 12b-1 plan
distribution charges.

Automatic Shareholders may make regular monthly or quarterly investments
Investment Plan of $100 or more through automatic deductions from their bank
accounts.

Withdrawal Plan Shareholders owning $10,000 or more of the Fund's shares may
elect to receive periodic monthly or quarterly payments of at
least $50.

Reinvestment Shareholders may direct that dividend and capital gains
Plan distributions be reinvested in additional Fund shares.

The above plans are completely voluntary and involve no service
charge of any kind.

IRA Plan The Fund has a Regular and Roth Individual Retirement Account
Plan (IRA) available for shareholders of the Fund.

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PREPARING FOR THE YEAR 2000